The Role of Price-setting by Committee in Medicare: Evidence from the RUC

Health care costs in the United States grew by 3% in 2014, nearly double the overall rate of inflation in the economy.  Recent research into the rate of health price inflation has explored the role of provider consolidation in the private market: because hospital and physician practices negotiate prices directly with payers, larger groups may extract higher negotiated prices from insurers (Ho and Lee (2015), Clemens and Gottlieb (2015)).   We explore a second and relatively understudied mechanism: the use of administered prices. Rather than bargain with providers, Medicare delegates the responsibility of setting reimbursement rates for new and existing medical procedures to a rotating committee of physicians.  Government payers---and some private insurers---adopt the committee’s fee schedule.  We exploit a novel dataset covering the internal deliberations of the committee to explore outcomes under this mechanism.  We find the price granted for a procedure varies importantly with the affiliation between the proposer and the voting members; the relative price is 1% higher when affiliation increases by one standard deviation. We examine how the voting process affects the pricing of complementary goods and the adoption rate of new technologies.